The free trade agreements (FTAs) that Vietnam has signed, or will sign, will reach most of Vietnam’s major leather and footwear export markets. That has created two-side effects on Vietnam’s export prospects.
Confident on larger playgrounds
The leather and footwear industry accounts for 8-10 percent of Vietnam’s exports and is the third largest export after garment - textile and telephone and parts. The sector’s export turnover was US$8.764 billion in 2012, US$8.4 billion in 2013 and US$10.3 billion in 2014. In 2015, the value is estimated to climb to US$13.5 - 14 billion and the localisation rate will reach 65-70 percent, a very high rate, as leather and footwear exporters have now signed contracts for full operations until the end of the third or even the fourth quarter of the year. Its export prices to the US, Japan, Australia and South America are stable or even slightly higher due to higher minimum wage increase in Vietnam.
Vietnam is the fourth largest footwear producer in the world by output and the third largest exporter by value after China and Italy. With about 10 percent market of global market share, Vietnam ranks second to China by market share, also in three largest markets of the US, the European Union (EU) and Japan.
Vietnam’s leather and footwear products are now present in 45 countries, mainly the US (earning US$3.3 billion in 2014, up 26.9 percent year on year), the EU (US$3.6 billion, up 24.1 percent), Japan (US$533 million), China and South Korea. The US imports 98 percent of sneakers for its domestic demand, mainly from China and Vietnam. According to the Footwear Distributors and Retailers of America (FDRA), Vietnam’s footwear shipments to the US have increased 20-21 percent annually on average since 2001. Currently, with about 10 percent of footwear market share in the US, Vietnam stood behind China with 80 percent of market share and before Indonesia with 4 percent, Italy with 0.8 percent and India with 0.7 percent. Vietnam’s footwear market share in the US is projected to climb to 12 percent in 2018.
According to the FDRA, the competitiveness of Vietnam’s exported footwear is potentially positive thanks to economic, monetary, political and social stability, numerous human resources, cheap and skilled labour, a golden-age population with 42.1 percent of labour force aged under 25, and a weekly working time of 48 hours (compared with 40 hours in China). Vietnam is taking the wave of leather and footwear restructuring in the region. Vietnam is being chosen by Japan as a production base, with its footwear output increased from 27 percent in 2010 to 30 percent in 2013. Nike, the largest shoemaker in the US, produces 42 percent of its products in Vietnam in 2013, compared with just 30 percent in China and 25 percent in Indonesia.
In the coming time, Vietnam will have more footwear producers than the current 550. Large-scale footwear producers (currently accounting for 20 percent of businesses, mainly foreign-led, and 75 percent of export value) will have greater opportunities as they can form closed production chains.
The signing and enforcement FTAs with South Korea, the Customs Union of Russia - Belarus - Kazakhstan, blueprint FTAs with the EU and TPP and the planned formation of the ASEAN Economic Community in late 2015 will open up new export opportunities for the Vietnamese footwear industry thanks to the rapid reduction of import tariffs to 0-5 percent (with 95-97 percent of tariff lines affected), convenient access to technologies and reduced import input costs. According to specialists, if the FTA with the EU is signed, Vietnam’s export tariffs from Vietnam into the EU will be slashed from current 12.4 percent to 0 percent. When the TPP is inked, the tax reduction even more dramatic, from 14.3 percent to 0 percent for most of Vietnam's footwear exports to the US. Only 17-19 categories of sensitive shoes will take a longer time for tax reduction like protective shoes and boots. Additionally, Vietnam’s footwear will also have more advantages when it has been granted EU’s generalised scheme of preferences (GSP) tax since early 2014 in this market. Meanwhile, Vietnam’s footwear industry is still a beneficiary of EU assistances like the Multilateral Trade Assistance Project (MUTRAP) with EUR1.7 billion, Unido, Switch- Asia, CBI Project on capacity building for staffs of the Trade Promotion Association. The expansion into a market with the least barriers is an opportunity for Vietnam to boost exports to 27 EU member countries with a population of 499 million people, with a strong purchasing power and high per capita income. ASEAN will become a potential consumer and production market with 615 million people, young workers and low-paid labour. Vietnam will be provided with an opportunity to deeply involve into international value-added fashion chains. In ASEAN, Thailand, Vietnam, Indonesia and Malaysia have developed footwear industries and have a lot of similarities. But, compared with the other three countries, Vietnam holds many competitive advantages in workmanship and labour costs and thus has greater chances to expand into the ASEAN Economic Community (AEC). Besides, Vietnam has the opportunity to cooperate with ASEAN countries to develop raw material sources. Cooperation among countries will help reduce investment rates, produce and supply in a large quantity, reduce imported raw materials, and enhance added value of products. Particularly, as AEC countries make footwear for export, they will be able to form a stable supply source and maintain market shares in major export markets such as the US, the EU and Japan.
Entering into FTAs, Vietnam also has more chance to upgrade its machinery and equipment, attract investment capital for the leather and footwear sector, and create a strong infrastructure foundation for the leather and footwear sector to expand its access to time-honoured high-grade shoe technologies, strengthen the linkage of businesses based on supply chain model, help businesses more easily approach partner nations and take part in global value chains.
More new momentum needed
However, FTA "playgrounds" also place new requirements for exports in general and footwear in particular, especially requirements on product quality, nationally branded products, global competitiveness, trade dispute settlement, global market information support and domestic market development.
Stricter FTA requirements on quality and technical standards pose enormous pressures on Vietnam’s footwear businesses to develop technological infrastructure, modernise machinery and equipment and train technical and managerial workforce, comply with commitments to intellectual property, consumer protection, small and medium enterprises, skilled labour, capital and financing; and reduce costs and improve product quality beyond technical barriers and customer requirements.
Materials make up for 68-75 percent of footwear price value. However, leather and footwear businesses of Vietnam only take on outsourcing and take part in only some stages of global footwear value chains; thus, the localisation rate reaches just 40-45 percent. They have to import the most important materials like leather, leatherette, canvas uppers, PVC plastic, PU paint, fabrics and glues, while depending on contractors from input materials to design, marketing and branding. As a result, Vietnamese firms find it hard to build up their own brand names. Reliance on foreign materials reduces the added value of exports. In the 2009-2013 period, although domestic production capacity reached 350 million sq ft a year, nearly trebling the output in 2006. 60 percent was allocated to export production but this was only enough for 40 percent of export production demand. In 2015, the leather output is hoped to reach 700-750 million sqft and will increase in the following years. Without proper investment for expansion or upgrading, Vietnam’s leather production output to export demand will decline. Leather and footwear businesses are standing before growing pressures and demands for setting up leather and footwear industrial parks with standard environmental remedy and wastewater treatment facilities and building material zones when more FTAs take effect.
To sharpen competitive edges and win competition, the leather and footwear industry must increase effective and well-prepared investments for marketing, designing, product development and market development; and enhance corporate social responsibility and environmental protection towards cleaner production and green sustainable development.
With 20 years of successful experience, a team of over 550 producers, and 700,000 workers (75 percent are female), the leather and footwear industry hopes to have a decree on supporting industry development where necessary tax incentives (corporate income tax, import tax, value added tax), infrastructure, credit access and SME development support will be increased. By 2020, Vietnam will produce 1.69 billion pairs of shoes, 311 million backpacks and handbags, 63 million tonnes of hard skin, and earn US$24.5 billion from leather and footwear exports.
With the support of the National Trade Promotion Programme 2015 carried out by the Vietnam Trade Promotion Agency (Vietrade) under the Ministry of Industry and Trade, the Vietnam Leather, Footwear and Handbag Association (Lefaso) will organise a leather and footwear export promotion conference themed “business and export capacity building for leather and footwear companies” in Ho Chi Minh City on July 15, 2015. The conference will discuss difficulties and advantages of Vietnam’s leather and footwear industry and some solutions from the standpoint of international organisations and brand names as well as internal solutions, particularly in the matter of materials and manpower.
This is regarded as a major event of the leather and footwear sector through which Vietnamese leather and footwear businesses will have the opportunity to gain a better understanding of the Vietnamese footwear industry, gradually adjust and remove difficulties, enhance production capacity for businesses, and expand cooperation and international trade. Through this conference, Lefaso also hopes for greater support from the government for the sustainable development of leather and footwear industry of Vietnam in the new era.
The conference will draw the attendance of officials from the Ministry of Industry and Trade, the US Chamber of Commerce in Vietnam, the Vietnam Chamber of Commerce and Industry (VCCI), world-leading shoe brands like Nike, Adidas and WWW, as well as executives from over 200 footwear exporters and material suppliers in Vietnam.
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